Internet sales tax bill gains momentum in Congress

Traditional retailers heard some magic words at a House hearing today: “Tax-free sales on the Internet may be coming to an end,” said Rep. John Conyers, D-Mich.

At issue is whether Congress should pass legislation that would allow states to start collecting sales taxes on online purchases. Under current law, online retailers have to collect sales taxes only if they have a physical presence in the state where the customer resides. Otherwise, customers are supposed to pay taxes on their online purchases directly to their states, but that hardly ever happens.

Bricks-and-mortar retailers have long complained that the tax-free status of e-commerce gives Internet retailers an unfair price advantage. As more retail sales move toward the Internet, state and local governments are increasingly feeling the loss of sales tax revenue. Even many Republican governors who favor keeping taxes low now think the time has come to force Internet retailers to collect sales taxes.

“Let me clear -- I am a Republican governor that does not believe in increasing taxes,” Haslam said.

“This discussion isn’t about raising taxes or adding new taxes. This is about states having the flexibility and the authority to collect taxes that are already owed by their own in-state residents.”

Haslem, testifying on behalf of the National Governors Association, estimates Tennessee alone loses about $400 million a year in sales taxes that go uncollected on Internet purchases.

The fact that more Republicans are coming around to the idea of taxing Internet sales is one sign of momentum for legislation such as the Marketplace Equity Act, which is sponsored by Rep. Steve Womack, R-Ark., and Rep. Jackie Speier, D-Calif. The Senate Commerce Committee has scheduled a hearing next week on similar legislation.

"If a Republican from Arkansas and a Democrat from California can come together on a bill that deals with tax issues, then the time really has come to finally resolve this issue," Speier said.

At least 30 states have tried to increase their sales tax collections on online purchases, with varying degrees of success. Some have cut deals with Amazon, which is opening distribution centers in more states, thereby giving it the physical presence that subjects it to sales tax collection responsibilities.

“Rather than hide its head in the sand, Congress could solve this issue for all states by allowing states to require online sellers to collect tax even if they do not meet a physical presence test,” Speier said. “It could set the conditions that states must satisfy if they wish to do so, ensuring that it is simple and not unduly burdensome, while at the same time respecting states’ rights.”

Opponents of the Marketplace Equity Act contend it would overly burden Internet retailers because they would be forced to collect sales taxes for nearly 10,000 tax jurisdictions in 46 states.

Even if states provide these retailers with software -- which already exists -- to compute the sales tax for all of these jurisdictions, online retailers would still have to hire consultants to integrate this software into their computer systems, said Steve DelBianco, executive director of NetChoice, a coalition of Internet companies. Plus, he said, e-tailers would have to hire accountants to be ready for audits by any state.

The legislation aims to exempt small e-commerce businesses from this sales tax collection burden by exempting companies with less than $1 million in online sales.

DelBianco said that exemption is far too low, because $1 million in online sales “is still just a mom and pop operation.” The 500th largest Internet retailer had $15 million in sales last year, he noted.

Amazon, which rang up $48 billion in U.S. Internet sales last year, supports the Marketplace Equity Act, but eBay doesn’t.

The $1 million exemption “falls far short of an acceptable small business retailer exemption,” said Brian Bieron, eBay’s senior director of federal government relations.

“Small business retailers using the Internet are entrepreneurs who are creating jobs, serving consumers and creating competition for established retail giants,” Bieron said. “They should be protected from any new Internet sales tax regime so that they continue to advance and grow.”